Investment helps Italy’s economy accelerate out of pandemic

Matteo Dell’Acqua never thought Italy’s rebound from Covid would be this good.

The 31-year-old boss of a family business says his investment in digitalisation and more environmentally friendly products made during the pandemic is paying off and has contributed to a 20 per cent annual increase in orders.

“It’s going very well,” said Dell’Acqua, whose company in Lombardy —Italy’s initial Covid epicentre — makes plastic pipes and tubing. The company is “sailing through” the post-pandemic phase, he says, thanks to “a positive atmosphere generated by the sudden and unexpected recovery”.

Italy, the first European country affected by the pandemic, is now changing gear in its recovery after a widespread vaccination programme, robust investment and expanding exports.

“Italy’s economic outlook is far better than we expected in the spring,” said Mario Draghi, Italy’s prime minister, last month. He expects the country to grow 6 per cent this year, in line with the OECD and international private forecasters, and much stronger than the 4.5 per cent expected in April.

Italy’s economic growth had the biggest upgrade of any other G7 country over the past five months, according to Consensus Economics, which averages leading economists’ forecasts.

It is a marked change for a country that has suffered years of economic stagnation, dragging living standards below the EU average. Economists hope it could be a springboard for longer-lasting changes, with an ambitious programme of EU-funded reforms and public spending getting under way.

“For the first time in many decades, Italy is in such a favourable position,” Laurence Boone, chief economist at the OECD, told the Financial Times. She pointed to Italy starting to tackle well-known brakes on growth such as a sclerotic civil justice system and public administration and its ineffective competition laws. “Italy today is in the position of resetting its economy.”

Draghi, the former president of the European Central Bank, has put much of the improved outlook this year down to his government’s vaccination campaign. Italy’s proportion of fully vaccinated people is the second-largest among G7 countries, after it made a Covid “green pass” mandatory for most workers and access to most public venues.

Draghi said this had allowed the reopening of businesses without a spike in hospitalisation, boosting consumer confidence and spending. Household consumption rose by a strong 5.5 per cent in the second quarter.

Nicola Nobile, economist at Oxford Economics, expects Italy’s economy to have expanded by about 2.5 per cent in the third quarter, following an above expectation 2.7 per cent rebound in the previous quarter.

Other factors are also at play in the recovery, said Emma Marcegaglia, chair of the B20 international business summit, a G20 business forum.

Investment is “booming”, said Marcegaglia, thanks to government-supported incentives for energy efficiency improvements and purchases of machinery and equipment, as well as more investor confidence in Draghi’s government after years of political instability.

Many businesses have also stepped up digital investments to adapt to the pandemic — helping Italy, which lagged behind EU peers on readiness for ecommerce, to make up ground. Italy’s investment was 5 per cent above pre-pandemic levels in the second quarter, stronger than a marginal contraction in Germany and a 4.5 per cent drop in the UK.

Line chart of Real gross fixed capital formation, rebased Q42019=100 showing Italy's investment has rebounded

Exports are also supporting the post-pandemic rebound, with Italy less affected than some countries by supply chain disruption thanks to lower reliance on semiconductor imports, according to some analysts. In the first seven months of the year, the value of Italy’s goods exports was up 4 per cent compared with the same period in 2019, better than stagnation for Germany and a contraction for France.

Manufacturers have proved agile in adapting to changing national and international restrictions, said Marcegaglia.

Line chart of Annual % change, by date of forecast showing Italy's investment and consumption outlook is improving

The green and digital transition could continue at a much faster pace if Italy gets the €205bn from the EUs “Next Generation” recovery plan that has been promised if key reforms and targets are achieved.

This is by far the biggest commitment by the EU to a member state and would be Italy’s largest support package since the Marshall plan after the second world war. Italy has already received an instalment of €25bn.

The OECD expects Italy’s economic output to return to pre-pandemic levels by early 2022, quicker than in previous estimates and much faster than the recovery in earlier recessions — although later than in most advanced economies. Before the pandemic, output had not recovered to levels of more than a decade earlier.

Line chart of Real GDP, rebased Q1 2018=100 showing Italy is expected to rebound faster than from previous crises

Italy’s government is certainly bullish. It expects strong growth to continue until at least 2024, reducing the country’s high public debt of more than 150 per cent of gross domestic product and the above EU average unemployment rate of over 9 per cent.

Nobile argues that “ambitious reform agendas typically face enormous political hurdles in Italy” and that official growth forecasts could be “too optimistic”. Political stability is also a threat to the reforms and spending plan.

“Good as all this modernisation may sound, Italy’s fractured political system has often meant that reforms started by one government get reversed or abandoned by the next one,” said Nick Andrews, economist at the investment research company Gavekal Research.

Meanwhile, there are shorter term concerns. Italy is already worried by Europe’s soaring energy prices and is to spend €4bn to subsidise bills. A protracted crisis could lower the pace of the recovery. Weakening demand following prolonged supply chain disruption and slowing Chinese economic growth create extra headwinds for the country and the global economy.

But Italy’s business and consumer optimism remain at a near-decade high. “Of course, we have to be cautious and continue to monitor critical factors such as the cost of raw materials and transport,” Dell’Acqua said, “but at the moment we have the wind in our sails”.

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